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July 2, 2014

PIMCO Total Return Outflows Top $64B: Morningstar

Another month, another period of declining assets for Bill Gross and the bond shop, according to the latest research

Looks like PIMCO needs a goalie like Tim Howard of Team USA to save it from bad news.

Despite the rehiring of Paul McCulley, the bond shop continues to experience investment outflows, according to Morningstar. U.S. investors pulled some $4.5 billion out of the PIMCO Total Return Fund in June, the research firm estimates. That’s about 2% of its roughly $229 billion of assets in May, leaving it with some $225 billion.

There was a bit of good news: the PIMCO Total Return ETF (BOND) pulled in $33 million last month, giving it about $3.4 billion in assets.

“Things were getting less and less severe for a while, but the past two months were worse than expected,” said Michael Rawson, a fund analyst with Morningstar in Chicago, in an interview. “There’s no real negative news from PIMCO, and investors are buying funds in the [intermediate-bond] category. This has got to be a bit disconcerting for PIMCO.”

Indeed. This brings the tally of outflows to 14 months. (That's just one less than the number of goals blocked by Howard in the match against Belgium on Tuesday.)

“Marginally, the outflows [are getting] worse, so this is a bit surprising – with the fund category getting better,” Rawson said. “Investors are less concerned with interest rates than last year, and I am surprised [with the recent outflows], given the recent hiring of McCulley. It’s surprising that the outflows haven’t stabilized a bit.”

Made in the Shade?

News of the outflows might not be a big shock to those following Morningstar’s major fund conference, which took place in June. PIMCO co-founder Bill Gross addressed the crowd, but in an unusual way, wearing sunglasses and proclaiming himself “one cool dude.” His remarks left many members of the audience somewhat confused.

This performance came about six months after the departure of then-PIMCO CEO Mohamed El-Erian and the frenzy it created as tensions between the two played out in the media.

These issues played a part in outflows at the time “with Mohamed leaving the firm and Goss making statements that gave the impression of poor communication and led some people to question leadership,” Rawson noted.

“But investors embraced them after the financial crisis,” the analysis said.

Given that U.S. outflows from the Total Return Fund have reached an estimated $64.1 billion, the atmosphere at the firm is likely to be grim.

“This must be causing tension in the firm as assets have shrunk a significant amount,” said Rawson. Bonuses paid to employees and management are tied to asset flows, “and those working in the industry are not used to losing assets.”

“There’s been a lot of shuffling of the ranks at PIMCO, and as assets shrink, the bonuses levels should be negatively impacted,” the analyst stressed.

("Patient investors are rewarded over the long term by sticking with core bond allocations in a diversified portfolio. The PIMCO Total Return fund has outperformed its benchmark and a majority of its peers over the last 1, 3, 5, 10 and 15 years," the company said in a statement given to Dow Jones.)

The situation at PIMCO stands in stark contrast to that of rival bond shop DoubleLine, led by Jeffrey Gundlach.

Morningstar’s estimates that the net inflows for the DoubleLine Total Return Fund in June were $515 million. Total assets in the fund at the end of June were $33 billion.

“This is representative of the [medium-term] category overall,” Rawson said. Its popularity with investors has improved, since “the interest-rate environment is less dire than a year ago when they were concerned with a sharp rise in rates.”